The following is a guest post about flipping houses. If interested in submitting a guest post, please read my guest post policy and then contact me.
It’s rare that I go a week without someone asking me to explain to them what they really need to know to get started flipping houses. If I had to pick one thing though, I would be forced to say the biggest contributor to my success in real estate investing has been networking.
And it’s at these networking events where I oftentimes get these questions from new investors looking to get into what has become a fairly popular, not to mention lucrative niche within the real estate investing space; namely house flipping.
If you are just getting started house flipping, there is much to learn – and I don’t think there’s just one thing I can point to that will lead to ultimate success. But there are a number of different things you should be aware of if you are planning on becoming one of the most successful house flippers in the world. Some of those are listed below.
1. Flipping Houses Takes Time to Master
If there was a way I could have inserted a big electrode into the back of your head to insert all the knowledge I have now on flipping houses when I was first getting started nearly five years ago, I would have done it in a heartbeat!
Unfortunately, that is not the case. But the first thing people should understand when they want to get into house flipping is that it takes time to master. Like Malcolm Gladwell says in his book Outliers, you need to put in your 10,000 hours in order to gain mastery of anything and house flipping is no exception. A great place to start is learning all you can about real estate investing which you can do here on Modest Money. I would also recommend a site like Bigger Pockets – which is one of the best online communities for new real estate investors.
And although I am a bit biased, I would recommend a site called House Flipping School as well.
Learn all you can, and then start doing. That is how you get your 10,000 hours – just know when you first start. You won’t get it just right for a while.
2. You can flip house with no money
To get started flipping houses, you can use your own money. Many people I know did just that. Unfortunately, most people don’t have a few hundred thousand dollars lying around – so they need to think of other ways to raise the money to get the property to begin with.
Definitely assess your professional and financial resources and if you know how much you already have or are willing to invest, then that is very good place to start. But after that, you’ll likely need to find investors.
The good part is that although you may not know it, investors are everywhere – all around you in fact. They could be your lawyer, your dentist, your next door neighbor, even your family. Personally, I have met some of my best investors and money lenders at REIA meetings in my local town.
Many of these are hard money credit lenders that will lend you money at a fairly high rate, but regardless if the numbers work then use them and get you first deal under your belt. The trick is to get going and use the knowledge you gained in #1 above and apply it.
The bottom line is this: Money is everywhere, you just need to get out and find it!
3. There are plenty of houses to flip
One of the other biggest questions we get is how to actually find the flips and the buy and holds we are now working on. Right now, we have over eight properties under contract -which is a lot for us right now – but they all came from getting very aggressive in our marketing to find them in the first place.
We scour absentee owners lists in MLS, hang bandit signs around town, talk to real estate wholesalers at REIA meeting and send out hundreds of mailers a week to distressed property owners in our area.
If we just so happen to find a good home to flip from the local real estate broker, we do that too. Buying a great property in a good neighborhood from your friend can be a good strategy too. The thing is you need to get out and market yourself – go out and get the deals, don’t wait for them to come to you.
They are out there…you just need to get out and find them.
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4. Flipping is a team sport
A lot of investors want to be the “lone wolf” and go out and do it on their own like James Dean or Steve McQueen. Rubbish! Flipping is a team sport and you need a team of stars to help you achieve what you want to achieve.
A short list of team members includes, real estate agents, private money lenders, wholesalers, bankers (yes, even them), real estate attorneys, a good CPA, general contractors and insurance agents.
All these people have areas of specialty that you can tap into – in other words, you don’t need to know it all. Tap into other people’s knowledge and expertise and when you do that they can help you along to achieving your goals.
5. Analyze and Stick to the Rules
Once you find a seemingly good property, then what? It’s time for analysis using a few house flipping rules. The first of which is the 70% Rule.
Let’s say the property you’re looking at, when it’s all fixed up, can be sold for $200,000 according to your real estate agent.
Let’s say your contractor says it needs $40,000 in repairs to be able to get it to that sales price. So what can you buy the house for?
Use the 70% Rule and take the $200,000 and multiply it by 70%, which gets you $140,000. Then take out your cost of repairs which is $40,000. What you have left is $100,000.
If you can buy the house for $100,000 (not $105,000 or $110,000), then it’s a good deal. This is how we figure out whether or not we should pull the trigger on every house flip we ever do.
The 70% rule protects you from downside risk and also covers your taxes, financing, maintenance, broker’s fees and holding costs associated with the house. If you stick to this rule and never deviate, you will be successful flipping…and be able to take home a very nice profit in the process.
6. Speed Equals Profit
In house flipping, time is of the essence. Unlike on the highway, speed does not kill in house flipping. The faster you can purchase, rehab and then sell the property, the more you’ll make.
Like we said in #5 above, the 70% rule covers your holding costs and your finance costs. But if you hold onto that property too long then all of these costs start to increase and mouth up…cutting into your profits.
For most of our flips, we use a six month timeframe as the average, anything less, then its gravy, anything more and we are covered by the 70% rule, but we don’t want to push it.
This does not mean your crew should “speed through the rehab” and cut corners. Far from it. Instead, do everything you can to create value for the new homeowner and the more you do, the more your trustworthy reputation will spread and the more your business will grow.
7. Manage the Rehab Tightly
When we flip houses, we use contractors. Many new house flipper like to do the work themselves but for me, that gets it he away of Rule #6 above. Speed is very important.
Having said that, you can’t just solely rely on your contractor to handle and supervise all aspects of the job while you’re off on a tropical island sipping mai tais. No way. You need to be involved…but not so much that your contractor is actually hampered by your activity.
Let him do his work, but stay involved. Hes the one who’s overseeing the whole crew, but you need to oversee him.
Your profit on the house will be largely dependent on your purchase price and the rules in #5 above, but as long as those are all in line, the next step of the process is execution – and you need to make sure that the contractor executes on his promises and responsibilities.
The good news is that once you start working with the same guys over and over again, you’ll start to trust them more and more and do less managing. But at the outset, make sure you are involved in every aspect of the rehab because if you’re not, the rehab is where much of your profits can go up in smoke if it’s not managed tightly.
Manage but don’t over-manage, let them do the work, but double check on everything they do and most importantly make sure the entire crew sticks to the plan and stays on or even under budget.
And if you do all that, you will make a profit, then move on to the next flip, the next flip and so on and so on.
If you made it this far, please leave a comment below! What do you think? Did I miss anything here? Let me know what you think.
Author Bio: Mike LaCava is a full time real estate investor, real estate investment coach and the President of Hold Em Realty located in Wareham, MA. Mike specializes in flipping houses and acquiring buy and holds with no money and runs the website House Flipping School to teach new real estate investors to do the same. He has also authored the book “How to Flip a House In 5 Simple Steps” available for free on his website.
26 thoughts on “The Top 7 Things You Must Know When First Flipping Houses”
Thanks for the great post. We are considering doing this in the future, since we like real estate as an investment and have a couple rental properties. This is on my list of things to spend more time researching- so thanks for the resources that you provided in this post!
Your Welcome Dee. Glad to be of service. Let me know if you have any questions.
My dad flips houses very successfully. He has said that the trick is the find an honest Realtor that is familiar with flipping houses and the area your in.
I would consider doing this in the future or investing in my dad’s business.
Sound like you Dad is a successful guy. He is absolutely right and working with a good realtor will not only help you determine what you can sell a house for but help you find good deals as well.
Best of luck and looks like you will have a great coach to help you.
Thanks for sharing your expertise on this subject. I especially found #5 very interesting as I never heard about this rule and always wondered how people determined the purchase price on a flip.
You’re very welcome. It is a great formula to get at your MAO pretty quickly but you MUST do your due diligence to make sure you get the ARV correct and your cost of repairs correct or the formula means nothing
The easiest way to find yourself in some major trouble is to try to “flip a house” with no money.
It sounds too good to be true and it is.
There’s a reason why all these dudes who “flip houses” are as fly by night as a night club in the projects.
The only way to invest in real estate is to buy the property cash at a county auction. You could split the purchase price with someone else or partner with a contractor to complete the rehab and then sell it for a profit or rent it.
Don’t have money to buy a house? Get a part time job and save. Please for goodness sake stay away from people who try to sell you on this “no money” bs just do it the old school way and you’ll make plenty money in real estate.
Oh yeah don’t forget, there’s a word for trying to get something for nothing it’s called stealing.
PS – I “flipped” houses for years I know what I’m talking about.
Thats great Darnell if you have cash but most people don’t and certainly can’t save hundreds of thousands of dollars on a part time job as you suggest. Even if you have the cash there is nothing wrong with working with other peoples money to leverage more deals for yourself or your business. I do this all the time and it is done by many investors. There is nothing wrong with your way but don’t just say it is the only way and call it BS. It takes time like any business to establish credibility and knowledge to do it.
My husband and I are hoping to this in the future when the time is right for us. Thanks for the tips! 🙂
Your welcome Stephanie. Happy to help. 😉
Very interesting post! I’ve seen flipped houses before and many times you can tell that they took shortcuts and even the light switch panels are crooked! That’s always sad to see since it could’ve been done right easily.
Haha I think I’ll stick my own line of work and not go into house flipping. It’s awesome that it works well for you. For me I’ll stick to fixing up my own house!
So true Christine. there are many fly by nighters that don’t do quality work. We take pride in doing responsible rehabbing so the end buyers get a great house for a great price.
I think flipping would be great becuase it can be so profitable but I don’t think I have the guts to invest that much of my (or an investor’s) cash.
If you don’t have the knowledge and don’t put the research in Liz you are correct because you Must be a good steward of your and other peoples money.
Its good to know your limits.
I don’t know if I’ll ever get into flipping houses. I view it a similar light as buying and selling stock frequently. If you do a lot of research and have patience, you can make money but you can also lose quite a bit as well. I will potentially look into the steps as a way of finding a starter home. If you can find something for cheap, it will become more likely to be a profitable rental later on.
Absolutely if you’re not prepared and do the right research you can lose a lot of money. I personally feel I have much more control of real estate than the stock market. Buying and holding for rentals is a great strategy use as well.
That’s pretty cool that there is a house flipping school. I haven’t flipped houses, but it’s always something that I’ve been interested in.
Check it out Tushar and let me know if you have any questions.
I like to watch flipping on TV and dream about it, but the market where I live (and therefore the one I know a sufficient amount about), doesn’t handle flips well.
What market is that Annie and why. Just curious and always looking myself to learn more about other markets.
Interesting post. I have a brother who tries to flip houses, but he often makes the mistake of not budgeting well, or trying to do all the work himself. He has luckily mostly broken even, but I don’t see much future for him to keep flipping houses.
Hello Bryce – Yes I see that often. If he is doing his own work and still not making money he doing something drastically wrong. He may be overpaying from the start and under estimating the cost of repairs. Hope he gets better at it. Tell him to use the 70% formula I talk about and deduct the cost of repairs if he was hiring someone to determine his maximum allowed offer. He also needs to make sure he knows what the selling price will be before applying the 70% formula to it and it needs to be as close as possible to the real selling price. An experience real estate agent should be able to help him determine that. If he buys with these guidelines and stay on budget he should be making around 20% of the sale price.
Love house flipping. I’ve been studying alternative ways to find deals, which seems to be my biggest real estate investment challenge. I just haven’t focused on it as much as I should I think.
These are great tips. I especially like the 70% rule, that should keep most first timers safe from really getting in too deep and risking loosing lots of money. Is this something that one could work as a side job, or does it really require your full attention (30+ hours a week)?
Though its an interesting topic, since most of us takes an active interest in real estate development. But flipping houses can be something new to try out, but believe it will help in giving a good knowledge about the ownership & house condition.
We bought a house in September of 2014 and we did our renovations that year. We just listed the house in January of 2015 but has not sold yet. Can I hold on to my investment cost from 2014 and deduct them later when I sell the house?
Thanks for your response and your great ideas above.